PokerStars: Online Gambling's Quiet Giant

Much of the Internet's multibillion-dollar gambling industry is squeezed between a gas station and a Persian restaurant in a Toronto suburb.

Head up to the third floor of the building, past the credit union branch, the personal injury lawyer and a real estate agent's office. That's where you'll find PYR Software, which holds itself out as a software development company that helps customers worldwide to retain industry leadership. But for PYR Software one client is more important than others. PYRs primary function is to develop and maintain software for PokerStars, the biggest online gambling company in the world.

Isai Scheinberg, a former programmer with
IBM
in Israel and Canada, founded PYR Software in 2000. Scheinberg helped his son, Mark, found PokerStars, which is based and regulated on the Isle of Man and hosts poker games online for customers around the world.

Even in an industry known for its tough-minded gamblers and shrewd, daring businessmen, the Scheinbergs stand out. When federal lawmakers passed the U.S.s first anti-online gambling law, the Unlawful Internet Gambling Enforcement Act (UIGEA) in 2006, rivals folded. PartyGaming, a public company which then dominated the online U.S. poker market, exited the U.S. along with other firms. The Scheinbergs? They kept right on playing.

PokerStars quickly became the biggest firm in the worlds most important market and now has estimated annual revenue of $1.4 billion and some $500 million in profits. This financial success stems from the rake, or fee, that PokerStars is able to charge players in return for hosting poker games or tournaments.

Much to the frustration of PartyGaming, PokerStars has used the cash generated from the U.S. market to expand globally, where online poker is a $4.8 billion annual business, according to H2 Gambling Capital. PokerStars, however, claims that its industry leadership is not related to the U.S. market, but rooted in its international operations, particularly in Europe.

The company insists its decision to keep taking U.S. bets has been carefully considered, even though the U.S. Justice Department has taken the position that online poker violates U.S. law, specifically the Wire Act of 1961. PokerStars says it has received legal opinions from several U.S. law firms stating it is not violating U.S. law. PokerStars believes that the passage of UIGEA in 2006 did nothing to change the legality of real money online poker in the U.S., PokerStars says in a written statement. It is PokerStars position that both the plain language and the legislative intent of the Wire Act strictly limit its application to sports wagering.

In a statement to Forbes, PokerStars says its top market position has largely been a result of its innovation. The company points to its early promotion of tournament poker online as opposed to cash games, including one tournament that attracted 150,000 players, a world record. On some level, PokerStars sounds like any other successful media company these days: A community of players has evolved where people from around the world log on to enjoy the game and a sense of competition with friends, PokerStars says in a statement. PokerStars has united millions of people from hundreds of countries.

The company, which has 1,000 employees, has bolstered its marketing with famous personalities who promote its online card room, including hockey player Matts Sundin, and retired sports stars like Boris Becker and Orel Hershiser. Actor Jason Alexander (of Seinfeld fame) has even signed on as a PokerStars ambassador.

But this is no ordinary business success story. This December Indian-born Anurag Dikshit, a founder of Gibraltar-based PartyGaming, is scheduled to fly to the U.S. to be sentenced to up to two years in prison. He has already pleaded guilty to violating the Wire Act for facilitating PartyGamings U.S. poker operations. People close to PokerStars say Isai Scheinberg takes the precaution of not entering the U.S., but the company says it does not comment on the travel patterns of its senior management employees.

In the summer of 2008, the U.S. Attorney in Manhattan froze some $34 million owed to poker players from companies that processed payments for poker games hosted by PokerStars and Full Tilt. Both companies refunded their customers, even though PokerStars says it was under no legal or contractual obligation to do so.

PokerStars is also a member of an industry group that has lobbied Washington to help delay implementation of UIGEA, which is aimed at preventing financial firms from processing fund transfers for unlawful Internet gambling, and back a bill by Rep. Barney Frank to legalize and regulate online poker. Frank helped convince the Treasury and the Federal Reserve to put off implementation of UIGEA for financial firms until June.

It is unclear what will happen in June to the business that caters to 2.5 million American online poker players or if the U.S. Justice Department will ever litigate a tough criminal case in this area. So far the Justice Department has only moved directly against parties who were willing to strike agreements. Either way PokerStars dominance of this lucrative global business seems secure for now.